The Great Affordability Lie?

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1:24David McWilliams: how you doing there it is time for the podcast and as we are coming up to Christmas this is the time of the year anyway that people talk about charity they think about people less fortunate than we are the economy becomes interrogated by issues of inequality who has who hasn't etc and it's against this background that today's podcast is all going to be about affordability. Not affordability in the American sense alone, but affordability in Ireland. And the reason is the following. Many, many people in Ireland are so fed up with the fact that economic statistics over the last year continue to say that Ireland is one of the richest countries in the world.

2:05David McWilliams: People are doing extremely well. People who are on the average income are doing well, etc. And yet, in reality, people are pinned to their collar. So it's this idea of the difference between income and cost. Because when people look at their own daily, weekly and monthly bills, what they're saying to themselves is, you know what? My costs are way out of whack with my income. At the end of the month, I have nothing left. And yet we're told that GDP goes through the roof and we're told that Ireland is this, that and the other. And the reason we're talking about this in Ireland is that this week in the United States on a very popular sub-stack job, right?

2:45Yeah.

2:45David McWilliams: A guy called Michael Green wrote a substack, and he said, and he's very much a finance guy, but a big, big following. And he said, look, I'm not going to write about financial markets this week because most people don't care about financial markets. In fact, for most people, it's entirely remote. And it even is the case in the United States that even though they have those, what they call 401k retirement plans, the vast majority of Americans are not worried about the stock market. But what he said, he wanted to look at poverty in America. And this guy, Michael Green, said the official definition of poverty in America comes from a formula in 1963 that assumes that if food accounts for one third of a family's budget, meaning they've two thirds of their budget to spend on something else, well, then they are just on the poverty line.

3:41David McWilliams: And he said to himself, hold on a second, that seems totally flawed. Why? Because the way in which Americans spend their money has completely changed over the last five decades. How so? So basically, if you think about what now are the major costs for American households, as opposed to 1963, first major cost is, of course, housing, has gone through the roof as a major cost. could be 30 % of people's monthly income. It goes on housing. Childcare for American families has gone through the roof. Healthcare has gone through the roof. Even telecoms, right? The price of a mobile phone and the price of maintaining the mobile phone.

4:27David McWilliams: These are new costs that American, average American families are now having to cover to just participate in society. So they have mad education bills. They have mad health bills. They have huge housing bills. They have obviously huge telecom bills. And of course, the new and biggest bill that most people have that didn't exist years ago was childcare. Why? Because many, many years ago, many women stayed at home and minded kids. Yeah, absolutely. That wasn't a big factor. So what Michael Green contends is that the American, average American, if they want to be regarded as having a decent life, need to earn between$120 ,000 and$140 ,000 a year.

5:17David McWilliams: Jesus. To just live. I mean, that's a good wage. That's a phenomenal amount of money, right? Yeah. Now, of course, economists have gone mad, so you don't understand this, and you're not taking account of the CPI indexation of the poverty line and declining food as a percentage of household income, all this stuff. So economists have gone mad. Right. You're going to have to explain some of that a little bit more. I'll explain that. But what I want to do is I always think that, you know, the RAF used to have this expression that you only take the flack when you're over the target. And I think one of the reasons the economics profession is going mad in the United States in response to this substack, which is doing big, big stuff on the internet, is that deep down economists realize that our perception of costs, benefits, incomes, etc.

6:10David McWilliams: is flawed. And, You know, Keynes always said, it's far easier to retain a bad idea than to embrace a new good idea. And I think what we're having is economists are really worried about retaining the bad idea. So with that in mind, John, this week's podcast is going to be doing what Michael Green did for America, doing that for Ireland, to see our Irish people who are regarded as below the poverty line, below the poverty line? Or is there a whole bunch of Irish people who are technically above the poverty line, but are actually in fact living in poverty? And the reason we're going to do this, John, is because I think that this American data is interesting.

6:57David McWilliams: I think it'll make sense to people. And I also think that, you know, we had Kyla Scanlon on a couple of weeks ago. And she wrote a book called In This Economy. And what the point of the book was that everybody has a different economy. So there isn't just one economy. There's various different economies because you spend on different things, because you're a different stage in your life, because you're a different stage in your familial life, and are because you're looking after different people in your family or extended family, or because the economy, as it appears to a millennial who has two kids and a mortgage is very different to the economy that appears, the same economy today, to a Gen Zer on a skateboard who's smoking reefer and is living in the box room of his mother's house.

7:49David McWilliams: And that economy today is very different from our generation. Generation, what are we, ex? X, I think. Okay. And again, our generation experiences the economy very different to boomers who are the older generation. And so it's that idea that there isn't just one economy. There are many different economies that present themselves at a different cost to different demographics. So that's what we're going to do. And each of these groups have their own reality. And as your man, And Edward de Bono said, perception is reality. Yeah, exactly. And they don't even have their own perceptions. They have their own realities, right?

8:30David McWilliams: Because they've got different bills to pay. They have different incomes, all that sort of stuff. But what I want to focus in on here is on whether or not the feeling in Ireland that people are poorer than the government claims we are is accurate. And why might that be? if it is the case that people's monthly bills are much higher than the monthly bills that would regard the government as suggesting you are on the poverty line it means there are many many more people in what is now called john the working poor so they are two people working in the family a mother and father maybe with two children and if you actually look at their costs be they transport cost, be they childcare cost, be they mortgage cost, be they housing cost, and you add them all up together over one particular month.

9:26David McWilliams: If those costs are way out of line with the income that the government suggests you should measure for people being poor or under the poverty line, then of course we have massive implications for politics, massive implications for economics, massive implications for how the society feels. That's the first thing. And after we've done that, we have to explain why might this be? Why might this be the case? So it's a big podcast today, John. Yeah, absolutely. You know, as you were saying there about how people spend their income, unlike what Charlie Hoy said, we are living way beyond our means. You know, these aren't people living beyond their means.

10:12They're just surviving. They're just spending their income on the basics. Like, as you said, rent, childcare, food, etc., etc.

10:21David McWilliams: Yeah, so the whole idea is the difference between the feel of the economy and the actuality of the economy. Yeah. And the most important thing is the feel. Yeah. So what makes economics tick, what makes the economy run, One, what makes the economy feel if we're in a buoyant phase or a recession phase isn't the data. It's the actual feel, what people are feeling. And again, the idea around Christmas is to contrast. Like survey after survey in Ireland revealed that people are pinned to their color. If you go out and ask people. Yet, officially, the economic numbers suggest that the poverty line is declining.

11:04so what explains the difference right yeah and if the vast majority of people are living well below

11:11David McWilliams: are above the poverty line why do so many people indicate they're getting annoyed with immigrants or getting free housing or excessive welfare payments because you think if everybody's working of the vast majority of people are well above the poverty line well then you know notions why would you care? So the question then is, are these figures that the state publishes, do they feel right to people? Or is what Kyla Scanlon talks about, the vibe session, a much more interesting idea? And the vibe session is a recession where the headline numbers of the economy look great, but the vibes suggest that people are feeling awful.

11:56David McWilliams: So that's what we're going to discuss a very Christmassy gig here, John. Yes, yeah, yeah. A feel-good podcast. I feel like Scrooge here, right? Okay. The miser. Yeah, exactly. Okay. Well, actually, just on that, Mac, on Irish household wealth, I saw a report there during the week from Davies Stockbrokers. And the headline was, Irish household wealth doubled since 2014 and set to double again by 2035. And this is kind of what you're talking about, being wealthy on paper, but not in reality. I mean, some of the highlights of this report, they say that Irish households net wealth has risen from 573 billion in 2014 to 1.32 trillion in 2024, and then is forecast to reach about 2.6 trillion by 2035.

12:51But this is, they say, is down to the inflation in property prices and the valuation. So it's kind of not real wealth as such. It's not liquid wealth. But they do go on to say that the accumulation of non-housing wealth, while strong in relative terms, is lagged behind the performance of the GNI or domestic economy. And this is kind of reflected in the lack of investments, particularly in pensions. But you know, as you say, when people are pinned to their collar and just getting by with day-to-day expense, they don't have surplus money to stick into their pensions and investment portfolios and all the rest.

13:30I mean, they're kind of almost a luxury for many people.

13:34David McWilliams: Well, I'll tell you, number one, if you're interested in this area, I did a documentary on RTE. It should probably be on YouTube called Ireland's Great Wealth Divide in about 2015, 2016, which revealed not only that property is the main driver of Irish wealth, like by far and away, but that the top 10 % of the population own about 50 % of all the wealth of the country. And so those figures, I presume, are exactly the same or broadly the same as they are now. That's the first thing. Secondly, that increase in wealth, as you said, is all to do with the doubling of house prices since, let's say, 2014.

14:14David McWilliams: But thirdly, people like Davies would always say, we're not spending enough on pensions. Why? Because they sell pensions. So they're in the business of flogging pensions. So they're always urging that. But I do think a good way to look at poverty is through time horizons. So poverty obliterates the future. And by that, I mean that very rich people have very, very long time horizons. so you see for example you know the richest man in the world what's his name? The little fella looks like a peanut what's his name? Elon Musk? No the other fella. Bezos. Bezos yeah he's got a project called the 10 ,000 year project and he's talking about the future 10 ,000 years ahead right?

14:56David McWilliams: Only very rich people so what I mean by poverty obliterates the future is that if you are poor you think about money today you don't have the latitude or the possibility or the luxury of having a five-year plan or a 10-year plan. Whereas if you are part of, let's say, the richer middle class, your children go to university, that's a five-year plan in and of itself. You can talk about building companies over a five-year period. You can actually see, in a way, one of the differences between rich and poor is that rich people envisage a future for them, which they feel and in many ways they know is a possible objective.

15:40David McWilliams: Whereas poor people are constantly looking for money today, so their time horizons are very low, which is why, for example, John, you have those payday, very, very rapacious loans at very, very high rates of interest. They're called payday loans. They tend to be targeted at the very poor who need liquidity today. And of course, it's always the case that if you go into a bank, the bank will lend you money based on collateral. and of course the only people who have collateral are the already rich. So if you're poor and you go into a bank and you have no collateral then you won't get a loan so therefore you can't envisage the future because getting a loan is only but it's quite an amazing thing is actually traveling in time because getting a loan says if I get a 30-year mortgage and I'm actually saying to the bank manager and that bank manager is also complicit in this idea that I am painting a picture for him of who I'm going to be in 30 years time.

16:33David McWilliams: Now that is an amazingly weird thing to do given that we don't even know what's going to happen to us tomorrow. But money facilitates that, banking facilitates that, and poor people don't get the same access to banking and consequently they don't get the same access to planning. And the problem is if you can't plan, you can't invest, and if you can't invest, you can't invest in yourself, you can't invest in your actual own capital. And at the end of the day, this is why you have these self-repeating cycles of poverty in many, many countries. And the way in which very poor countries have got out of this successfully is what's called micro banking, which was initiated in Bangladesh, a bank called Grameen Bank.

17:16David McWilliams: And what it did was it gave very poor women very small amounts of money. Yeah, I saw a lot of this in India when I was there and how that actually operated. And it was, it's so simple, but so brilliant where a whole village acts as the guarantor for one person getting a loan. And that loan might be just to buy a goat or buy a few chickens so they can have milk or eggs that they can keep some and sell some on and then hence pay back some loans. And then everyone in the village becomes a guarantor for everyone else. Exactly. And it's funny that Muhammad Yunus was the guy who set up Grameen Bank, micro banking, and he won the Nobel Prize for Peace.

17:58David McWilliams: And that's the interesting thing because, you know, this is a far more consequence to far more millions of people than many other people who have got the Nobel Peace Prize. But we won't go into that, John, because that's something that Donald Trump is looking for actively. Now, it's interesting we mentioned Donald Trump because the anti-Trump, Zoran Mandami, won the New York mayoral election on the issue of affordability. And this is what we're talking about, is that people hear all this stuff about being wealthy, but in actual fact, whether it's rent or energy or food or anything, affordability in New York City is the crisis.

18:41And Mandami focused in on that and won hands down

18:45David McWilliams: because that's what people are worried about. But you know, of course, Mike, that affordability is a Democrat scam. Have a listen to this. Okay. Affordability is a hoax that was started by Democrats who caused the problem of pricing. And they didn't end it because that was an affordability problem. We brought it down. Look at energy. Look at the gasoline prices, like the simplest. And it's the biggest. Because if energy comes down, everything comes down. That's the way it works. So now we're bringing the prices down, way down. Beef is coming down now. We've done certain magic and beef is coming down.

19:27But again, the worst inflation in history, we inherited that. When I came in, that's what he had. And we fixed inflation. And we fixed almost everything, if you want to know the truth, including eight wars. We've got one to go. But they're like scam artists. you know they're con i call them con men and women the reason that they had the highest inflation in the history of our country is because they had the highest prices but we brought them down and now we have normal inflation there you go mac there it is you're all you're old friends you're old friends i don't know how he can he can actually say stuff like that with a straight face surrounded it by his whole cabinet, the J.D.

20:12Vanseson. Anyway, that doesn't bear thinking about it.

20:15David McWilliams: It's fake news, but look, okay, so let's look at the case in Ireland, right? Let us do for Ireland what Michael Green did for the states. Now, Michael Green in that substack, and readers can Google it, suggested that because costs have ballooned so monumentally in America, merely to participate in the basics of society, now requires a family to have a six-figure salary of, he says, about 140 ,000. Yeah. Now, that may well be wide off the mark, but it's a very interesting idea. So why don't we look at what's going on in Ireland, right? Okay. What's the story here? So here in Ireland, the poverty line is set at 60 % of the median disposable income, right?

21:03David McWilliams: So the median is not the average. The median is the very middle point of the income. So if there's 100 people earning, it takes those 100 people earning and it actually looks at who is the 50th richest or poorest. So who is in 50th place? That's the median. They do that in statistics is in order to actually make sure the average means something. So for example, if there was 10 people in a room and everybody had an income of a grand, that would be, the average would be a grand, right? Yeah. If Dennis O 'Brien walked into that room, the average then of that income would be taken up to 500 million or something because he's a multi-billionaire.

21:44David McWilliams: So that's why the average makes no sense. It depends who the last guy coming in is, right? So the median is the way in which you get rid of that. It's a much more statistically accurate figure in order to actually try to figure out where people are. So in Ireland, that figure is 344 euros. per week. That's roughly 18 ,000 euros a year for a single adult. If you're below that, you're on the poverty line. For a household of two adults and one child, the official poverty line is 645 euros per week, or 33 ,643 per month, right? Yeah. Cross that income line, and you are, by these definitions, not poor, fall below that income line, and you are poor.

22:34David McWilliams: So that's what we say. So the question then is, does this figure of€33 ,643 per year for a family with two adults and a child equate to the cost of running a household for two adults and a kid, right? Yeah, it depends where you live as well. It does, but you can smooth that out by taking what average rents are and whatever. So basically, that formula hasn't changed for decades, right? Even as the cost of living in Ireland skyrocketed, this is the thing, right? The official government figure looks at income, but it doesn't explicitly account for cost. Now, this is a crucial difference because the assumption is that anyone above this 60 % median can afford a decent standard of living in Ireland.

23:28David McWilliams: But the question is, does Ireland now fit neatly into that 33 ,500 bucks? Okay. And here's where things get tricky because life in Ireland today looks nothing like it did when these benchmark metrics were defined, right? Right? Decades ago, one modest income could often support a family. Like you remember the road we were brought up on. Most families had just one person working. Most people, right? Yeah. And there were families of four or five. Okay. Housing was cheaper. Childcare didn't really exist because there was lots of stay-at-home parents. There were relatives. My ma ran the crash anyway.

24:08David McWilliams: Exactly. For the rest of us, right? Okay. College didn't require debt. People didn't get to debt to go to college, right? And the basic standard of living was always attainable, almost without two salaries. So those days are totally gone in Ireland, right? Rents are now record highs. Average rent in Ireland, the open market, had exceeded two grand a month nationally for the first time this year, right? It's incredible. It's incredible that. Even outside these hotspots like Dublin, what have you, right? A modest two or three bedroom place is going to cost you 1500 euros per month yeah mortgages themselves for those of those who are lucky to have bought they aren't much cheaper child care has become almost a second mortgage for people and Ireland has some of the highest child care costs in Europe so parents are paying roughly about 800 euro a month for one child in a creche and about a grand in urban areas Essentials like food, utilities, transport, they've all increased dramatically.

25:12David McWilliams: Groceries have increased by 16 % in 2023 alone, John. Yeah. I've noticed that myself, big time. You know, we do a weekly shop and I was actually just saying this to Sheena the other day going, Christ, you know, and it's even just bread and real basic stuff. meat has shot up, cheese. I mean, even avocados and champagne even, you know. John, champagne is so outrageously expensive. I just can't believe it before Christmas, right? There I was having a bottle of Moet and... For breakfast. Anyway, right? Running a car, often two cars, because people have two cars because the public transport isn't good enough.

25:55David McWilliams: Yeah. And these, again, have increased petrol, maintenance, taxes, loan payments, insurance, all these sort of things. Even though Ireland has public health care, half of Irish people, half of Irish people take out private health care. And GP visits we know are expensive, all this sort of stuff. So if you actually look at what the average family is spending, you will get the following job, right? Adding everything here. So childcare is about 800 euros. Yeah. Food is about 900 euros, as you were just saying. Transport is about 500 euros. This is the average. Healthcare is about 300 euros. And general utilities like telephone bills, electricity bills is about 500.

26:41David McWilliams: So without even taking holidays, going out, Netflix subscriptions, all these things, right? That you think most people have now, right? A family of two parents and a child need about 4 ,400 euros per month to cover basic costs. That figure then is$52 ,800 per year. So now we're into something interesting. The government says that people above an income of$33 ,600 are above the poverty line. Yeah. But the basic back of the envelope calculations for costs says that you need a income of 52 grand, nearly 53 grand just to participate in Irish society. So that means that the notional family could be well above the poverty line in terms of income, but deeply stretched in terms of basic costs.

27:45David McWilliams: And that family would need an income of 20 grand more than the poverty threshold in order just to meet a modest budget. And to put this another way, John, the poverty line falls about 40 % short of what an ordinary Irish family realistically requires to avoid financial stress. But this is a massive conclusion to arrive at, because what you're saying is, in the same way as Mondami found his constituency of working poor. There is a massive constituency of working poor in Ireland who haven't really found a place to go politically. But when they hear that we're doing very well, and when they hear that we are amongst the richest people on earth, and when they hear that their poverty level is 33 grand, And they know that even when they're earning 52 grand, they're pinched their color.

28:48David McWilliams: And this has profound implications for A, how useful economics and economic indicators are, number one. But B, has massive implications for immigration, for people's perceptions of welfare payments. And are they fair or not? Because again, you hear people say, look, it's not fair that people on welfare get free houses or immigrants get free houses, all that sort of stuff. that's not coming only and explicitly from racism or some perception of classism. It's actually coming from the fact that they're mad as hell because they're working their arses off and they're still just about treading water.

29:25Do you know, I was reading a article in the paper the day about the likes of the big four, the PWCs and the Accenture and all those guys, and they are freezing graduate salaries because they were big for taking in all the graduates, all the clever guys coming out of college. They're freezing those salaries because they're using more and more AI. Now, I know that's a particular sector and it's a particular group of people, but where the big four start making changes like that, a lot of other industries and companies will follow. You're absolutely right. So now there's going to be a downward pressure on salaries and particularly those junior salaries when people are just getting going in their careers, when people are setting up house and just setting up families and that kind of stuff.

30:18So let me ask you this then, Mac, and maybe we'll tackle this after the break. What is this going to do? Where will this lead politically and economically down the road?

30:30David McWilliams: Okay, well, let's talk about that after the break.

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32:17Okay, Max, so you're saying that the way the government in particular looks at wealth, poverty, and that poverty line is skewed and is inaccurate. So what is the

32:31David McWilliams: upshot of this in the long run what i'm saying is that there are many tens of thousands of people living in ireland who are in this gray area who are what you would describe as the working poor so they are two a mother and father or whatever happens to be to go out for work if the mom stays at home or if the husband stays at home to look after the kids they obviously lose that income that they would otherwise have if they go out to work to acquire more income the cost of child care knocks them back to square one so they're kind of stuck and child care is one of the big problems number one number two then you've got to figure out well why is this why is there a difference between income and costs they should tend to equilibrate themselves out in the economy.

33:23David McWilliams: The reason they don't do this, John, in Ireland, is I come back to the Dutch disease idea, the spigot that is the money coming from the multinationals. The money coming from the multinationals totally and utterly queers the pitch in terms of Irish economics, because that money's flooding in from outside. It isn't generated internally, but it's spent internally by the state. And that means that Irish politics has turned into a smash and grab exercise to get its hands on all this massive liquidity. This essentially free money that's coming in from Apple and from all those companies, right? This means that the state's expenditure rises dramatically, as has been the case over the last four years.

34:10David McWilliams: Government expenditure in Ireland has gone up 50 % since the pandemic in real terms. Yeah, yeah. And what this does is because of the way inflation builds in a society, this adds inflation at every stage, to the housing market, to the food market, to the energy market. Why? Because the money is cascading into a rather static economy. And as a result of that, prices of everything goes up. But most Irish people are working in small businesses and places where wages can't go up. So what we see is costs are expanding on a general basis, driven by the liquidity associated by the multinationals, which is cascading into the economy.

34:55David McWilliams: But incomes aren't going up because most small companies can't actually match these pay increases. And so as a result of that, a rich country like Ireland is getting rich on paper and getting rich on all the technicalities. But it's actually getting poorer. Why? Because this gap is opening up between the cost and people's income. And as a result of that, what the government is saying is that the minimum income you need before you're described as poor is, let's say, around 33 ,000. But our back-of-the-envelope calculations show that the minimum cost you need to cover in order to participate in a basic way in this society is about 52.

35:41David McWilliams: and that is a massive, massive, nearly 40 % difference. So how do you address that? Well, this is what Mandami's saying. Mandami's saying, look, we've got to go in and we have got to put in rent controls and we have got to go in and we've got to tax the rich a little bit more to pay for the poor, etc. What I'm saying is this is the politics of the next five years everywhere. And it's the politics that's feeding into the right wing in Europe because the Gilets Jean in France, that was an affordability movement, right? Reform in England is not. Reform in England is more of a cultural movement. Well, it's deriving most of its votes in poor areas.

36:25David McWilliams: The AFD in Germany is also, it's an affordability movement. Maloney in Italy is an affordability movement punctuated with some intense nationalistic flavoring. But what you have is, and again, Donald Trump appealed to the uneducated, to the left behind, to the people who felt that they weren't the elite. They were his constituency. And Mandami has robbed that constituency farm. So what I'm just saying is that these figures, John, suggest that in Ireland there is a massive, massive opportunity for an affordability campaign driven by either the left or the centre or somebody to address the fact that there is a deep, deep chasm between what the economy suggests you need to earn to remain above the poverty line and what the costs in the economy suggest you need to have in your back pocket to participate in society.

37:29David McWilliams: And this is a massive fault line and it's emerging all over the world. And that chasm is going to be filled by populism of whatever flavor. Yes, it could be populism, but populism is a derivative of popular and popular is of the people. And if the people feel that this is the major issue, and if a candidate or a party that describes itself as populist adopts that mantle, well, then very few people can complain. And certainly not the center, because the center is the one that have been saying for years, don't worry if you do the right thing, if you work hard, you'll get on, your kids will get on, etc.

38:13David McWilliams: And what these figures are saying is, no, that's actually bullshit. Only some kids are getting on, and lots of kids are getting left behind.

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